Taxes, fees, deductibles, and many other payments are not good news to many people.
However, there’s nothing much than can be done – considering the fact that they are necessary. That’s the reason why it is important for everyone to understand the logic behind mortgage insurance.
Home Equity Conversion Mortgage (HECM) is a complex financial product that has a number of charges attached to it. The charges are a result of different government interventions.
In a bid to attract customers, some lenders try to do away with some of the charges as much as they can. However, the truth is that these fees are stipulated by the Federal Housing Administration (FHA).
To be more specific, the Home Equity Conversion Mortgage mandates an insurance fee referred to as Mortgage Insurance Premium (MIP). It is a premium meant to benefit both borrowers and lenders.
A Closer Look At Home Mortgage Insurance Premiums
After a borrower closes a HECM, they are charged with a Mortgage Insurance Premium depending on the number of benefits withdrawn for the entire period the loan was active (first year).
Provided a person takes less than 60% of the available funds in the first year, they will be allowed to pay upfront of 0.5% as MIP of a home’s appraisal value.
However, anyone who takes more than 60% of the available funds will be required to pay a mortgage insurance premium of 2.5% of the appraisal value.
This strategy is designed to encourage people to borrow money to spend it wisely and avoid defaulting on the loan.
The mortgage insurance premiums are normally charged every year – although the fees will not be calculated using a borrower’s proceeds from the home loan. It will instead gain interest over a longer period of time and paid out after the loan has matured. The yearly premium is 1.25% of the total remaining loan balance.
It is however important to note that however much the MIP will increase the to the loan balance, a borrower will never be asked to pay extra value of the house after the loan has matured and ready to be paid. In short, a reverse mortgage is a non-recourse loan.
Why Is A Home Reverse Mortgage Necessary?
The inclusion of mortgage insurance premiums in all HECM loans gives the government an opportunity to protect both lenders and borrowers.
Besides, mopping money from all MIPs across the country makes it easy for the government to repay lenders that lose money through loan defaults.
In addition to that, the premiums ensure that in case a company in charge of bank accounts is put under receivership or closes down abruptly, borrowers will still be able to access their money.
Last but not least, the MIP is a guarantee for borrowers that they won’t be asked to pay more than the value of their homes – as long as the HECM has matured and become ready to be disbursed.
Understanding A Non-recourse Mortgage Loan
To understand the meaning of a “recourse loan”, we need to go back and understand the relationship between lenders and loans.
It doesn’t matter is a loan is categorized as recourse or non-recourse – all loans are normally determined through the way it affects the assets of the borrower.
Lenders can take over collateral deposited by borrowers in case they default in both recourse and non-recourse type of loans.
Nonetheless, with a recourse loan, a lender can go after other properties of the borrower to recover the entire value of the loan borrowed. This can only happen if the collateral deposited by the borrower is not enough to settle the remaining loan balance.
When it comes to a non-recourse loan, the lender is supposed to absorb the difference in a cases where the collateral deposited by the borrower is not able to settle the remaining loan balance.
This is where the benefit of a Mortgage Insurance premium is clearer. The government will instead caution both the lender and the borrower from the effects of failure to pay on the parts of either party.
The reason why most reverse mortgage loans are viewed as non-recourse is that borrowers will never owe extra money on the value of a house when it is being resold to pay back the loan.
If a person has a normal Home Equity Conversion Mortgage, then his or her debt can be settled by an amount less than the remaining loan balance – or 95 percent of the home’s appraisal value.
It is worth noting that most borrowers tend to like non-recourse loans. This is generally because of the factors mentioned above.
2019 Changes On Mortgage Loans
Towards the end of August 2019, the United States Department of Housing and Urban Development introduced a number of changes on reverse mortgage loans.
One of the major changes was the introduction of a different cost structure for reverse mortgage insurance. The stricture is applicable to everyone who has a federally-insured HECM. It is already in use and designed to streamline the federal government’s oversight role.
In a nutshell, reverse mortgage insurance has a lot of benefits despite the criticisms that it often gets.